Retail buyers give MFs a pass in 2012

For many executives in India's mutual fund sector, the year gone by must have been one of the worst. Whether it was rampant closure of equity folios (primarily retail), poor sales, action-packed regulatory environment or in several cases shutting down of branches across the country; all impacted the struggling industry.

However, industry officials are optimistic and expect the coming years to be less tougher as they foresee improvement in the macro economic scenario from hereon and stability in regulatory framework.

Despite an unexpected rally of over 20 per cent (the initial part of which was completely missed by fund managers) in the country's stock markets, participation from domestic investors remained abysmal till date.

At every rise, the fund industry faced redemption pressure as the retail segment was quick to book profits and exit the mutual fund space. Amid an uncertain environment with highly volatile equity markets, the sector witnessed closure of a massive 3.9 million equity folios during the January-November period - never before seen in industry's history. According to sector officials, the current and last month of the year may not be any different.

Poor sales and wafer-thin margins amid tight regulatory framework burdened fund houses further. The only positive factor, claim insiders, are the flexibility in using the total expense ratio (TER) and ability to charge higher expenses if more assets are pulled in from beyond the top 15 cities.

Ajit Menon, executive vice president at DSP BlackRock Mutual Fund, says, "Though the equity segment continued to be a spoiler as the year saw negative net sales in equities, the fixed income side of the business did grow well. Since interest rates remained high people have been shying away from equity investments."

True. Till November, the year saw a net outflow of Rs 12,702 crore from pure equity schemes (excluding ELSS), while in the income segment the story was the other way round with the category poised to see Rs 67,773 crore of net inflow.

Srinivas Jain, executive director & chief marketing officer of SBI Asset Management, admits : "Equity is a big issue. Huge volatility kept retail away. Going forward, I am cautiously optimistic as we are yet to see how distributors react to direct selling of mutual fund products." According to him, the year was hyper-active from the regulatory point of view.

Menon, who is quite optimistic about the coming years, adds, "Whatever has to be done has been done on the regulatory front. Now, what's left is to deal with the operational issues." According to him, things will get sorted out in due course and the industry will grow. He expects equity as well as fixed income markets to do well, going forward.

Already expectations of rate cuts are on the rise. And with the central government stepping up its reform-related measures over the last few months, market participants expect a turnaround sooner than later. This makes mutual fund executives believe that domestic investors would come back to equities next year.

Navneet Munot, chief investment officer (CIO) at SBI Asset Management, says, "Expectations of rate cuts, continuation of easy global liquidity, bottoming out of economic data, more action from the government and return of domestic investors into equity markets should propel equities to a new high next year."

This year already has seen majority of the industry's equity schemes performing better than the gold schemes. Many have outperformed the benchmark indices, too.

According to the CIO of a foreign fund house, who did not want to be named, for any bull market to sustain, fiscal deficit has to come down. "Government's spending has to come down. The rally, which we saw this year, was amazing, but it's not backed by fundamentals. It's a liquidity-driven rally, which at times may be dangerous for the Indian markets."

Industry officials have now set their eyes on the Reserve Bank of India and the government's measures with just one more year left before the next general elections. They believe that once operational issues regarding the new regulations are done with, industry will return to the growth path. But they pinpointed that the "mantra" to bring in investors remain the spread of financial literacy through investor awareness programmes.